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Political Controversy Isn’t The Only Concern With Buyback ETFs

This article was originally published on ETFTrends.com.

Share repurchase plans have recently drawn the ire of U.S. senators from both parties, but the   Invesco Buyback Achievers ETF (PKW) is still up more than 14% this year.

The $1.43 billion PKW tracks the NASDAQ US BuyBack Achievers Index. That index “is comprised of US securities issued by corporations that have effected a net reduction in shares outstanding of 5% or more in the trailing 12 months,” according to Invesco.

Despite the increased Congressional scrutiny, companies still increased share repurchases over the first quarter, potentially bolstering a smart beta ETF strategy that specifically targets companies with a history of stock buybacks.

Some project that buybacks are on their way to another record this year, potentially outdoing the over $1 trillion seen in 2018, CNBC reports. However, politicians' views on buybacks is not the only issue investors should consider when evaluating buyback ETFs, including PKW.

“Share repurchases do not paint a complete picture of a firm’s financial health or its attractiveness as an investment,” said Morningstar in a recent note. “Repurchases can be financed by debt, rather than by the strength of the underlying business. Such a strategy isn’t always desirable. And repurchases can hurt returns if managers overpay for their shares.”

Ongoing Devotion

While controversy swirls around buybacks, data suggest U.S. companies remain devoted to share repurchases as an avenue of rewarding shareholders.

According to Bank of America Merrill Lynch, repurchases are up 91% year-over-year, with staples and materials leading the charge followed by tech and financials. Over the past week, there was nearly $2.8 billion in deals, the fourth-highest level since BofAML began tracking the data point in 2009.

Technology and consumer discretionary stocks combine for 45% of PKW's weight. Financials and industrials combine for more than 31%.

“Companies are more likely to ramp up their buyback programs when they are flush with cash, not necessarily in the depths of a bear market when their share prices are most depressed,” said Morningstar. “Consequently, a company's decision to institute a repurchase program does not necessarily mean that its stock is undervalued. Rather, managers typically use repurchases to return excess cash to shareholders when they do not have more-attractive investment opportunities, similar to a dividend.”

Morningstar has a Neutral rating on PKW.

For more information on the buybacks strategy, visit our buybacks category.